CIBC plan will reward shareholders: analyst

A quick response to regulatory requirements is likely to boost both the earnings and share price of Canadian Imperial Bank of Commerce, according to analysts at National Bank Financial.

In a note to clients, financial services analyst Peter Routledge points to recent comments by CIBC chief executive Gerry McCaughey that it is the bank’s “first priority” to use its stash of so-called excess capital to reduce $4.8-billion of preferred shares and other instruments that will no longer qualify for the ultra-stable Tier 1 category of capital under new Basel III rules.

The ability to react promptly to regulatory requirements is also likely to narrow the 11% discount at which CIBC trades relative to its peers, the analyst said.

While the bank could wait — regulators have allowed for a gradual phase-out of affected Tier 1 instruments between 2013 and 2022 — “the Basel III rule changes create an incentive for early redemption of these instruments” and CIBC’s “strong regulatory capital position provides the opportunity for such an action,” Mr. Routledge wrote.

The analyst said the bank is likely to initially target some non-cumulative preferred shares, which make up the bulk of the affected Tier 1 capital at $3.2-billion.

Under various scenarios, Mr. Routledge estimates that reducing obligations of the preferred shares through a buyback could add between 8¢ and 12¢ per share to CIBC’s annual earnings.

The analyst has an “outperform” rating on the stock and a target price of $91.